Trust the “Trusts” · Trustee has absolute discretion to apply income can capital of the trust Beneficiaries, as a result of trustee’s discretion, are not entitled to receive

Trust the “Trusts”…..only a matter of time

June 2019

June 2019

Trust the “Trusts” | Page2

Family business in India – overview & characteristics

Typical characteristic

s of Indian family

businesses

Multiple operating entities for historical reasons

Personal and business

assets held in same

structure

Promoter shareholding spread among

various individuals, relatives &

promoter held companiesExtended joint

families with diverse family

members running various

businesses

Challenge of liquidity for promoters

Complex and multi-tiered

cross holding structures

India has the highest

percentage share of family

businesses in Asia

Over 80% of businesses in

India are family businesses

Family businesses account for

90% of gross industry output

Family businesses contribute

79% to the Indian GDP

June 2019


Succession planning & its benefits

► Smooth transition of wealth to the next generation

► Segregation of economic interest and management control

► Segregation of business and personal assets

► Inheritance tax planning (if levied in future)

► Simplification of group structure goes hand in hand with estate planning - facilitating liquidity

to promoters with minimal tax leakage

► Perpetuating / preserving / maintaining / holding the family wealth for generations

► Flexibility to distribute economic interests in desired proportions to family members and at

desired time

► Regular income flow for family members

► Building a robust structure in conformity with applicable succession laws

What is succession / estate planning?

What is achieved by Succession / Estate planning?

Estate Duty

still unthinkable?

June 2019


0 10 20 30 40 50 60 70 80

USA

UK

France

Japan

South Korea

Spain

Germany

Italy

Canada

Income Tax % Estate duty %

In general, the estate duty is levied only when the inheritance value is above the specified threshold.

The rate is generally dependent on the value of inheritance. In some countries it is also dependent on

the relationship of the beneficiary with the deceased like in France, Denmark, etc.

Estate Duty – worldwide

June 2019


Estate Duty – India future?

► Estate duty was abolished in India in 1985 citing high cost of collection and causing disparity in the

economy

before abolition, estate duty was as high as 85%

taxed at the time of the death

market value of the assets owned

► Minister of State for finance in 2014 made a press statement of the possibility of introduction of Estate

Duty

► He further clarified subsequently that there will be a threshold limit to trigger estate duty also suggested

a limit of more than Rs. 25 crs to trigger estate duty provisions

► Experts believe Estate duty was not introduced by Modi Government 1.0 due to effects of GST and De-

monetisation on the economy

► A Task Force was formed by the Finance Minister on 26th November, 2018 to overhaul the Income Tax

Act and suggest a new direct tax code for the country

► Outgoing Finance Minister on 24.05.2019 extended the tenure of the Task Force to provide a detailed

report by 31st July, 2019

► There is a wide shortfall in the direct tax collection of the Government of India post reduction of tax rates

and this makes a case for reintroduction for Estate Duty

► Further, with the abolition of Wealth Tax (in 2015) there is no statute which levies any tax on the wealth

of an individual in India

► Manifesto 2019 of the BJP places strong averments to provide benefit to the middle class of the country.

As Estate duty shall be applicable to only wealthy few, the justification to Manifesto 2019 survives.

Trusts:

legitimate way to

avoid Estate duty

June 2019


Trust

Taxed in hands of Trustee

(u/s161) or Beneficiary (u/s166)

Taxed in hands of

Trustee (u/s164)

Taxed in hands of Settlor

Exempt from tax

Trusts – Broad structure

Settlor

Trustee

Trust

Property

Beneficiaries

Public / Religious /

Charitable TrustPrivate

Trust

RevocableIrrevocable

Specific Discretionary

Trust:

►a legal concept

►Property vested / placed under control of a person or

persons

►For benefit of specified individuals or organizations

Specific trust:

►Share of each

beneficiary is pre-

determined at the time of

formation

►Trustee to be taxed in

the capacity of a representative taxpayer

Discretionary trust:

►Trustee has absolute

discretion to apply

income can capital of the

trust

►Beneficiaries, as a result

of trustee’s discretion,

are not entitled to receive

definite proportion of income or corpus

Settlor: Person who places his property or settles his

property into the trust for the benefit of other specified

individual(s)

Beneficiaries: Individual(s) for whom a trust is created for

Trustee: Person in whose confidence the property is placed

for the benefit of specified individual /individuals

Trust Property: The subject matter of the trust which is

applied for the benefit of the beneficiaries

Trust Deed: Instrument (usually written) governing the trust

- should state clearly objectives of settling the trust

June 2019


Trusts – key benefits

Avoidance of Estate Duty

Absolute discretion and control

Easiest and hassle free way to transfer family assets

to coming generations

Highly Flexible

Privacy

No requirement of “Probate” from court

Negligible scope for litigation

Protection of assets from bankers, creditors and

lawsuits

Protection of assets under insolvency

Ring fencing of family assets in the event of divorce

June 2019


Tax

SEBI regulations

Competition regulations

Company law

Stamp dutyNBFC/CIC

regulations

Foreign Exchange

Regulations/FDI

Guidelines

Relevant Succession

Laws

IP & other sector/

industry specific

regulations

Key

regulations

► Mergers/demergers

► Share transfers

► Protection of tax attributes

► Delisting

regulations

► ICDR regulations

► Applicable succession laws

► Forced Heirship Rules

► Pricing Guidelines

► Conditions for ODI

► FDI policy for downstream

investment

► ECB regulations

► Transfer of:

► Immovable property

► Shares

► Manner/mode of transfer

► Conveyance on court schemes

► Approval from CCI on

merger/demerger/acquisition,

etc if asset/turnover exceeds

specified limit

► Specific conditions for buyback,

capital reduction

► Scheme for merger, demerger,

etc to be in line with s 391-394

► Applicability

► Registration

► Reporting requirements

► Specific rules and

procedures laid for certain

industries eg. telecom, real

estate, etc

► Tax leakage on cash flows

► Transfer Pricing Regulations

► ToC regulations

► Disclosure

requirements

Trusts – laws and regulations

June 2019


At least 47 listed promoters who are the who’s who of India Inc. have set up family trusts

since 2013.

“The transfer of my direct and indirect holdings of Mahindra

shares were done to the trusts for meeting the estate

planning needs of my family. We had sought and obtained the

necessary regulatory permissions in this regard,"

- Anand Mahindra, chairman of M&M

(This is being done) because of taxation benefits. Suppose, if

an estate duty comes, the trust doesn’t have to pay. Many

countries have it. A lot of people are talking about inequality of

wealth, etc. In the US, they still have an estate duty. If the

government wants to do it, they are in majority, they will do it.

There is so much talk about it all over,“

- Adi Godrej, chairman of Godrej Group

Notable business

Groups having trust

model:

Tata Group

Mahindra & Mahindra

Adani Group

Godrej Family

Wipro

Havells India

Emami Group

GMR Infrastructure

Vinati Organics

Max Group

Prestige Group

Trusts – time tested structure

June 2019


A Trust has far more advantages than disadvantages

Today, trusts in the present form are exempt from estate duty

however with the advent of the Direct Tax code this route may

also be plugged. Hence one must act in time to get this

benefit

In summary, succession planning is a process and should be

planned in an organized manner

Planned succession can help in protection and smooth

transition of wealth whereas an unplanned succession can

lead to erosion of family wealth and could create bitterness

and feuds in family

Finally, Trust is an established mechanism of succession

planning tool and provides protection, flexibility and

transition of assets to next generation

Trusts – our concluding thoughts

Bagaria & Company Pvt Ltd

701 Stanford,Junction of S V Road & Burfiwala Marg,Andheri West,Mumbai - 400058+91 22 26250 5600

bagariaco.com

Assurance | Tax | Transactions

https://www.linkedin.com/in/bagariaco/

https://twitter.com/bagariacompany

https://www.facebook.com/BagariaCompany/

Arun Bagaria

Managing Director

E: [email protected]

Rahul Bagaria

Director

E: [email protected]



https://www.linkedin.com/in/bagariaco/

https://twitter.com/bagariacompany


June 2019


Disclaimer.

This material is prepared by Bagaria & Company (a brand of Bagaria & Company Pvt Ltd) and is intended to provide general

information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Further, the views and

opinions expressed herein are the subjective views and opinions of Bagaria & Company based on such parameters and analyses

which in its opinion are relevant to the subject.

The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before

making any decision or taking any action that might affect your personal finances or business, you should consult a qualified

professional adviser. Neither Bagaria & Company nor its affiliates shall be responsible for any loss whatsoever sustained by any

person who relies on this material. This material is intended only for the use of the entity/person to whom it is addressed and the

others authorized to receive it on their behalf. This document is not and should not be construed as an advertisement or a marketing

document in any manner whatsoever and its for private circulation only.

This document can be relied only for the person it is addressed to and it is a confidential document.

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Trust the “Trusts” · Trustee has absolute discretion to apply income can capital of the trust Beneficiaries, as a result of trustee’s discretion, are not entitled to receive